Fu­til­ity of new tier-based re­cap­i­tal­i­sa­tion of Nige­rian in­sur­ers

While NAICOM may be act­ing in good faith to ac­com­mo­date all com­pa­nies within the um­brella of the TBMSC, it can­not re­clas­sify com­pa­nies on the ba­sis of sol­vency short­fall, which, in any case, is al­ways tran­sient.

Financial Nigeria Magazine - - Contents - Ifeanyi Ug­wuadu, a Fi­nan­cial Nige­ria Guest Writer, is the Lead Ed­i­tor of In­sur­ance and www.iin­tel­news.com.

In 2007, the in­sur­ance in­dus­try took a leap of faith with min­i­mum cap­i­tal re­quire­ments for com­pos­ite in­sur­ance com­pa­nies raised to N5 bil­lion, gen­eral or non-life in­sur­ance com­pa­nies raised to N3 bil­lion, while N2 bil­lion was stip­u­lated for life-only in­sur­ance com­pa­nies. The rein­sur­ers had to raise their min­i­mum cap­i­tal to N10 bil­lion.

Be­fore the in­creased cap­i­tal­i­sa­tion re­quire­ments in 2007, in­sur­ers op­er­ated within the min­i­mum cap­i­tal range of N150 mil­lion and N200 mil­lion. N350 mil­lion was the cap­i­tal­i­sa­tion re­quire­ment for com­pos­ite in­sur­ance and rein­sur­ance com­pa­nies as con­tained in the In­sur­ance Act 2003.

Thus far, there has not been any agreed stan­dard or mea­sure for what the ad­e­quate cap­i­tal po­si­tion should be for play­ers. How­ever, there are reg­u­la­tory sol­vency ra­tios that de­ter­mine if a com­pany pos­sesses the re­quired fi­nan­cial mus­cle to un­der­write busi­nesses un­der the class it is reg­is­tered. The sol­vency ra­tio, which is de­ter­mined based on the in­sur­ance firm’s pre­ced­ing year’s bal­ance sheet, is the size of its cap­i­tal rel­a­tive to all the risks the in­surer has taken.

Large cor­po­ra­tions like the Nige­rian Na­tional Petroleum Cor­po­ra­tion (NNPC) of­ten place em­pha­sis on bal­ance sheet sizes of in­sur­ers as one of the re­quire­ments for bid­ding for their ac­counts. The bat­tle to ac­quire such ac­counts is usu­ally very in­tense. Any in­surer that has un­der­writ­ten NNPC’s as­sets in any par­tic­u­lar year has seen its pre­mium in­come rise sig­nif­i­cantly.

Yet, these phe­nom­e­nal top-line growths do not trans­late to the bot­tom line in any par­tic­u­lar year. The rea­son for this is not far-fetched. Nige­rian un­der­writ­ers and bro­kers who lead big-ticket in­sur­ance busi­nesses only front. This means in the ab­sence of the lo­cal skill to un­der­write such large cor­po­ra­tions' as­sets, the en­tire risks are passed to a for­eign-based rein­surer and the "fronting com­pany" in Nige­ria only re­ceives a per­cent­age of the pre­mium as com­mis­sion.

The re­newal of the pol­icy of­ten be­comes a chal­lenge given the ap­par­ent lack of lo­cal ca­pac­ity. In the pol­i­tics and pur­suit of per­sonal in­ter­est that en­sues, the NNPC “lu­cra­tive” busi­ness and other gov­ern­ment busi­nesses are hardly re­tained by one par­tic­u­lar in­surer year in, year out.

There are also other is­sues that put pres­sure on the pre­mi­ums of in­sur­ers. They

in­clude prob­lems of un­eco­nomic pric­ing, re­stric­tive in­vest­ment guide­lines and few in­vest­ment win­dows. In ad­di­tion, in­tense com­pe­ti­tion for avail­able busi­nesses of­ten drives most com­pa­nies into ac­cept­ing busi­nesses with ques­tion­able risk pro­files. This ex­poses the in­sur­ers to losses or huge risks when it can­not cover claims.

The Na­tional In­sur­ance Com­mis­sion (NAICOM)’s com­plaints unit has had to ar­bi­trate so many cases be­tween in­sur­ers and the in­sured. This has led to the no­tion that sol­vency ra­tio short­falls con­sti­tute the main is­sue faced by in­sur­ance com­pa­nies in the coun­try.

Why tier-based re­cap­i­tal­i­sa­tion

The Tier-Based Min­i­mum Sol­vency Cap­i­tal (TBMSC) struc­ture was de­signed as a launch pad for the much-talked-about Risk-Based Su­per­vi­sion (RBS) pro­gramme. The ob­jec­tive of the new pol­icy – which is ex­pected to com­mence on Oc­to­ber 1st, 2018 – is to pro­duce spe­cial­ist com­pa­nies or niche play­ers with ad­e­quate cap­i­tal to do busi­ness ef­fi­ciently.

Ac­cord­ing to NAICOM, “the re­cap­i­tal­iza­tion scheme is aimed at de­vel­op­ing and ap­ply­ing ap­pro­pri­ate tools that con­sider the na­ture, scale and com­plex­ity of in­sur­ers, as well as non-core ac­tiv­i­ties of in­sur­ance groups, to limit sig­nif­i­cant sys­temic risk and thereby achieve sound­ness of in­sur­ance com­pa­nies and con­trib­ute to the achieve­ment of sta­bil­ity of the fi­nan­cial sys­tem.”

Ow­ing to the out­come of the reg­u­la­tor’s stress tests on com­pa­nies fol­low­ing the 2016/2017 eco­nomic re­ces­sion in Nige­ria, it was found out that had NAICOM im­ple­mented the pol­icy, some com­pa­nies would have been forced to ei­ther merge or be force­fully ac­quired. This was the rea­son the new min­i­mum sol­vency op­tion was ar­rived at with the aim to achieve the fol­low­ing: a) al­low in­surer’s to fo­cus on their ar­eas of strength; b) im­prove set­tle­ment of claims; c) en­hance lo­cal re­ten­tion; d) en­cour­age mar­ket dis­ci­pline, pru­dence and ap­pro­pri­ate pric­ing; e) en­cour­age in­no­va­tion and deepen mar­ket pen­e­tra­tion; f) en­cour­age vol­un­tary merg­ers, and build in­vestors’ con­fi­dence; and g) build a stronger and more vi­brant in­sur­ance in­dus­try.

Le­gal hur­dles for the TBMSC

The pro­vi­sions of Sec­tion 24 of the In­sur­ance Act 2003 seem to be the le­gal ba­sis for these fresh cap­i­tal­i­sa­tion re­quire­ments. Sec­tion 24 pre­cisely deals with sol­vency mar­gin, which is at the core of any in­sur­ance com­pany’s health. How­ever, the law pro­vides room for com­pa­nies to make up for any short­falls in the sol­vency mar­gins in any par­tic­u­lar year. Ac­cord­ing to the law, fail­ure to shore up cap­i­tal as re­quired by the sol­vency needs may lead to can­cel­la­tion of regis­tra­tion.

Nev­er­the­less, the In­sur­ance Act 2003 stip­u­lates that an in­sur­ance com­pany can both be cap­i­talised and reg­is­tered as a com­pos­ite com­pany, gen­eral busi­ness or life com­pany. And the busi­nesses they can trans­act are well spelt out for the var­i­ous cat­e­gories of regis­tra­tion.

To be sure, NAICOM is em­pow­ered to in­tro­duce changes to the cap­i­tal re­quire­ments as at when re­quired. But the law does not em­power the reg­u­la­tor to re­de­fine the nomen­cla­ture or struc­ture of com­pa­nies cap­i­talised and reg­is­tered in com­pli­ance with the ex­ist­ing law. If in­deed, new min­i­mum cap­i­tal re­quire­ments are to be im­posed, then rea­son­able amount of time should be given to com­pa­nies to raise the cap­i­tal.

While NAICOM may be act­ing in good faith to ac­com­mo­date all com­pa­nies within the um­brella of the TBMSC, it can­not re­clas­sify com­pa­nies on the ba­sis of sol­vency short­fall, which, in any case, is al­ways tran­sient. The TBSMC can be wo­ven into a new leg­is­la­tion to amend the ex­ist­ing Act.

New cap­i­tal re­quire­ments

For com­pos­ite in­sur­ers that wish to be re­clas­si­fied to ei­ther Tier 1 or Tier 2 com­pa­nies, they have to re­cap­i­talise to N15 bil­lion or N7.5bil­lion, re­spec­tively. For gen­eral in­sur­ers that must re­clas­sify to Tier 1 or Tier 2, they need to in­crease their cap­i­tal base to N9 bil­lion or N4.5 bil­lion, re­spec­tively. Life in­sur­ance com­pa­nies are ex­pected to re­cap­i­talise to ei­ther Tier 1 or Tier 2 with in­creased min­i­mum cap­i­tal of N6 bil­lion or N3 bil­lion, re­spec­tively.

The new reg­u­la­tion also makes al­lowance for in­sur­ers who might be will­ing to main­tain the cur­rent cap­i­tal. They will play in the low­est tier, namely Tier 3.

The main dif­fer­en­tia­tor un­der the dif­fer­ent tiers is the class of busi­nesses un­der­taken. For in­stance, Avi­a­tion, oil and gas, an­nu­ity and group life form the bulk of busi­nesses that are ex­clu­sive to Tier 1 com­pa­nies. The cur­rent and emerg­ing growth ar­eas in the in­dus­try, where there is in­creas­ing com­pe­ti­tion, are oil and gas, an­nu­ity and group life in­sur­ance.

How­ever, the ma­jor fo­cus now is on the com­pa­nies that will be the ben­e­fi­cia­ries of a new cap­i­tal raise in the in­sur­ance in­dus­try. My ob­ser­va­tion is that the big play­ers need more space at the top and these new cap­i­tal re­quire­ments, if im­ple­mented, would cre­ate the space, es­pe­cially in those emerg­ing growth ar­eas. No doubt that re­tail is the fu­ture of Nige­ria’s in­sur­ance in­dus­try but the struc­tures need to be in place.

Out­look

Tech­ni­cal is­sues aside, there is no ba­sis for the reg­u­la­tor to as­sume that the prob­lem of low to­tal gross writ­ten pre­mi­ums (GWPs) as a per­cent­age of gross do­mes­tic prod­uct (GDP) will end by merely reg­is­ter­ing com­pa­nies on the ba­sis of tier-based min­i­mum sol­vency. Sol­vency is­sues be­come ex­is­ten­tial risks for com­pa­nies when these is­sues pro­tract. And cur­rently, there is no im­me­di­ate reg­u­la­tory over­sight to ad­dress those is­sues. One so­lu­tion is to deepen in­sur­ance pen­e­tra­tion in the coun­try.

Nige­ria’s large pop­u­la­tion is a great po­ten­tial for in­sur­ance growth. In­sur­ance pen­e­tra­tion in the coun­try is at an abysmal 0.4%. But growth can be achieved through in­no­va­tion. While in­sur­ers must in­no­vate to meet the needs of Nige­ri­ans, the reg­u­la­tor should also ex­pand the in­sur­ance base through leg­is­lated in­sur­ances by in­te­grat­ing in­sur­ance poli­cies within the frame­work of ser­vices pro­vided by gov­ern­ment agen­cies.

While in­sur­ers must in­no­vate to meet the needs of Nige­ri­ans, the reg­u­la­tor should also ex­pand the in­sur­ance base through leg­is­lated in­sur­ances by in­te­grat­ing in­sur­ance poli­cies within the frame­work of ser­vices pro­vided by gov­ern­ment agen­cies.

Mo­hammed Kari, Com­mis­sioner for Fi­nance, Na­tional In­sur­ance Com­mis­sion

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